U.S. food and beverage stocks have underperformed broader market in 2012 as volatile commodity prices crimp margins industry wide, according to report
February 17, 2012
– Food and Beverage stocks have underperformed the broader market in 2012 as volatile commodity prices crimp margins industry wide. The PowerShares Dynamic Food & Beverage Portfolio (PBJ) is up slightly more than 1 percent this year. A modest downturn in commodity costs, and an uptick in M&A activity has raised investor optimism in the industry in recent weeks, however. The Paragon Report examines investing opportunities in the Processed & Packaged Goods Industry and provides equity research on Diamond Foods, Inc. (NASDAQ: DMND - News) and Kraft Foods, Inc. (NYSE: KFT - News). Access to the full company reports can be found at:
Earlier this week Kellogg Co agreed to buy Pringles potato chips from Procter & Gamble (P&G) for $2.7 billion in a cash deal that makes the cereal company second only to PepsiCo Inc in the global snack food market. P&G wanted to sell Pringles, the last of its food businesses, to focus on its core household and consumer goods products, The Associated Press reports. Kellogg was able to swoop in to buy Pringles from P&G. after Diamond Foods Inc.'s proposed $1.5 billion acquisition of the brand fell through. The Diamond Foods deal became "no longer feasible," according to P&G Chief Executive Bob McDonald, following the discovery of improper accounting at Diamond that led the snacks company to replace its chief executive and finance chief.
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The Processed Food Industry has been negotiating volatile corn, sugar and wheat prices for the better part of a year. Morgan Stanley recently placed corn as its top bet in farm commodities, foreseeing an average price of $6.60 a bushel in 2011-12, above the $6.29 a bushel that futures have been pricing in. "Prices need to move higher to justify the demand rationing currently implied by the USDA balance sheet," Morgan Stanley Stated in the report.
Wheat prices, meanwhile, fell almost five per cent last week and despite estimates world wheat stocks are at all-time highs. The U.S. Department of Agriculture projected global wheat stocks would reach 213.1 million tonnes by the close of 2011-12, an increase of 3.1 million tonnes from its projection the previous week.
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